The picture improves
Ireland’s successful exit - on time and on target - from the EU/IMF bailout programme has been the economic highlight of 2013. But, the manner of the State’s departure has also divided opinion. The Government did not seek a precautionary credit line as insurance against potential difficulties arising on the return to capital markets. Some criticised that decision as a reckless gamble – given the uncertain domestic and global economic outlook in 2014. But most saw it as a display of national self-confidence, on regaining some lost economic independence. The Exchequer is now fully funded up to the first quarter of 2015.
However, the exit of the troika does not also signal the end of austerity, or indeed of external oversight of the economy. Fiscal adjustment via cost cutting measures continues, albeit at a slower pace, as does international surveillance, but in a less intrusive form. By 2015, further fiscal consolidation should ensure a budget deficit below 3 per cent of GDP. And by then the worst of economic times should be over.
This year the economy has remained sluggish, but economic activity has gathered pace as the year advanced. A major negative factor has been the impact of the pharma cliff, where top selling drugs lose their patent protection and market share to cheaper generics, greatly depressing company revenues. Nine out of the top ten pharmaceutical multinationals are located in Ireland, and the sector accounts for a quarter of all exports. This year as an increasing number of blockbuster drugs manufactured in this country went off patent, pharmaceutical exports declined sharply. This contributed to a fall in national output in the first quarter, followed by a weak recovery in the second quarter. By quarter three, the growth rate of the economy had picked up, buoyed by a strong increase in domestic demand.
Consumer sentiment and business confidence also rose as the year progressed. Inflation steadily declined, with the annual rate close to zero by November. Unemployment, at 12.5 per cent has continued to decline from a peak of 15.1 per cent early last year, partly reflecting high emigration. Employment has increased significantly, with 58,000 more at work, a 3.2 per cent rate of annual increase. And tourism numbers have surpassed expectations, boosted by the marketing success of The Gathering in attracting overseas visitors to Ireland. These positive indicators of an improving economy helped to stabilise the national property market, with residential and commercial property prices rising sharply in Dublin. This month Forbes magazine judged Ireland to be the best country in the world to do business. Nevertheless, one disappointment has been the failure by Moody’s, a credit ratings agency, to upgrade Ireland from junk bond to investment grade status. But that may happen in the months ahead
For all that, problems remain. The banks have been slow to tackle mortgages in arrears, and to deal with the high level of impaired loans in the small and medium enterprise sector – which accounts for 70 per cent of private sector employment. The Central Bank, in its assessment of the balance sheets of domestic banks, found that they needed to make extra provision for potential bad loans. Late next year the European Central Bank will conduct a rigorous stress tests of euro area banks, which will establish whether Irish banks do need to raise more capital – a key event in Ireland’s economic recovery.
How global financial markets view the Irish economy is best reflected in the cost of sovereign debt. In March, when Ireland returned to market financing, the State raised over €7 billion at a competitive rate. By December, the yield (interest rate) on Ireland’s 10-year bond had dropped to 3.5 per cent, with foreign investor confidence bolstered by debt restructuring completed earlier in the year. Expensive promissory notes were replaced by long-term bonds, which greatly reduced debt burden, while maturities of loans under the EU/IMF programme were extended, easing the State’s future financing needs. Nevertheless, Ireland remains exposed and vulnerable to economic setbacks and shocks – slower than expected growth in the economy, or market volatility involving one of the euro zone’s other peripheral economies.
One adverse development in 2013, with worrying longer terms implications for the domestic economy, is the growing international criticism of Ireland’s 12.5 per cent rate of corporation tax. In May, members of the US Senate and the UK parliament claimed Ireland was a tax haven, a charge denied by the Government, and rejected by the OECD, which is drafting a new international tax framework. By October, the Government set out its response in the budget, by amending the tax residency rules for “stateless” companies. That initiative has, for now, helped to defuse a controversy that seems set to carry over into 2014, and beyond.